The Fall of China...And What It Means for America

CHINA HAS ALWAYS held something of a mystery, or a contradiction. Here is a society that once achieved great things. Its accomplishments dwarfed those of Western society. Yet today, China must play catch-up with the West.

Consider that nearly a century before Christopher Columbus arrived in America or Vasco de Gama arrived in India, a Chinese explorer named Zhang He sailed as far west as Africa. The ships of Zhange He’s fleet were enormous by Western standards. His “treasure ships” stretched as long as 440 feet and 180 feet abeam. The ships boasted up to nine masts, as high as 90 feet, and carried up to 500 men. You could have put all of the ships of Columbus and da Gama together on a single deck of one of Zhang He’s treasure ships.

The fleet itself consisted of 317 ships, more than twice the size of the great Spanish Armada (which had 132 and was assembled more than a century later).

Jeremy Siegel’s recent book, The Future for Investors, describes notable discoveries made by the Chinese. Yet many of those discoveries, much of that knowledge, were subsequently lost. I found this remarkable:

“The first timepiece was invented by Su Song in 1086, but the Chinese had to be reintroduced to clocks when the Jesuits came in the 16th century. The Chinese developed movable type in the 9th century, 500 years before Gutenberg’s invention of the printing press. The Chinese used silk-reeling machines as early as 1090…but as late as the 19th century…silk was entirely hand reeled. The Chinese invented gunpowder for use in rockets and bombs in the 10th century, but they had to relearn the use of the cannon from the West in the middle of the 14th century.”

This is only a partial list. Still, it shows China had advanced beyond its contemporaries in the West. However, as Siegel points out, many of the discoveries were lost. Improvements in the standard of living in China have greatly lagged those of the West since the Industrial Revolution. Society regressed.

Why? What happened?

Here we come to an unavoidable intersection between economic prosperity and political tampering. For most historians lay the blame at the feet of the Ming Dynasty. It was the despotism of the Ming Dynasty that set in motion China’s tumble into economic stagnation.

John King Fairbank, the doyen of Western historians on China, wrote in his magnum opus China: A New History, “Anti-commercialism and xenophobia won out, and China retired from the world scene.”

The Ming rulers squashed exploration efforts. Shipbuilding was restricted to small vessels only. They shunned foreign contact and closed China’s borders. These decisions had great impact on the course of world history. Consider that Chinese explorers easily could have sailed to America long before Europeans began establishing colonies there. Think how different the world may have been if they had.

As Joel Mokyr, a professor at Northwestern University, observed in his book The Levers of Riches, “The Chinese were, so to speak, within reach of world domination, and then shied away.”

This is why China today is the world’s largest turnaround opportunity.

Moving to Freer Markets

For now, China looks to be liberalizing. More and more evidence suggests a steady movement toward freer markets. In October, The Carlyle Group, a U.S. private equity firm, became the first foreign group to gain control of a large Chinese company. Carlyle paid $375 million for an 85% stake in Xugong, a large Chinese maker of construction equipment.

Also in October, UBS became the first foreign company granted a stake in a licensed domestic broker, with its 20% stake in Beijing Securities.

And in another sign that China is moving in the right direction, the Railway Ministry is going to open up China’s railway system to foreign ownership and control. Traditionally, the railway system has been one of the most sensitive and guarded areas in China.

That’s a nice string of firsts, and there are many more. Plus, there is a burgeoning universe of small privately owned companies in China. Plenty of non-Chinese firms also have growing profitable businesses in China. I’ll be writing more about this, and my recent trip to China, in my upcoming issue of Capital & Crisis. But suffice it to say here, China is more than just potential today. It’s a real-live red-blooded market.

Insatiable Government

Still, political risk is real, and the nature of government suggests it is hard to shrink. Insatiable Government, newly published, is a good collection of essays on this theme by the late journalist and critic Garet Garrett.

In the book, Garrett applies his incisive reporting and thoughtful pen to the growth of American government, especially during the years of the New Deal. During this time, Garrett — along with several others, such as John Flynn and H.L. Mencken — fought a long retreat against the advancing size and power of the state.

Garrett worried about the size of American commitments abroad, about the continuing debasement of the Constitution and the Bill of Rights, about the lack of political restraint and the erosion of liberty.

The inexorable strengthening of government power led Garrett to conclude that it was in the nature of the beast itself. “Government is like an organism with such an instinct for growth and self-expression that if left alone, it is bound to destroy human freedom… No government ever wants less government — that is, less of itself.”

Lessons for the American Empire

In all of this, there are lessons for America’s growing empire. A good book on this theme is Bill Bonner and Addison Wiggin’s Empire of Debt. “How Empires Work” is, in fact, the title of Chapter 3.

The duo notes, “The United States entered the empire business in the late 19th century. She was able to straighten herself out for a few years, but the lure of it late became irresistible. Between 1917 and 1971, the country was transformed from a simple republic that mostly minded its own business to a grandiose empire with imagined interests and real troops nearly everywhere.”

The problem with empires is that they all end badly: “A great empire is to the world of geopolitics what a great bubble is to the world of economics. It is attractive at the outset, but a catastrophe eventually. We know of no exceptions.”

China, as old as it is, has already spent time in the empire business. It’s lived and died as an empire before the Industrial Revolution got going. As all empires before it, catastrophe ensued. Now, after a long remission, the Chinese are on the upswing, but the scars of empire run deep. Will they be able to shake them and continue the path toward free markets and free people?

And for the United States, will it continue to slide down the slippery path of imperial ambition? Will the American Empire — as the Chinese empire did during the Ming Dynasty — endure a long period of stagnation and even regression? Will xenophobia and anti-commercialism win out and the American Empire retire from the scene?

These are critical questions that no one can really answer. But the weight of history suggests the Chinese have a tough struggle ahead in beating back the power of the state. And America’s empire will not last forever…

Quote of the week: “The length and severity of depressions depend partly on the magnitude of the ‘real’ maladjustments, which developed during the preceding boom and partly on the aggravating monetary and credit conditions.” – Gotfried Haberler, Prosperity and Depression, 1937

Headline of the week: “Credit Card Offers Stacking Up at Homes of the Newly Bankrupt” – NY Times

Reverent relevance: Chevron announced a $5 billion dollar share buyback plan over the next 3 years. This follows right after a $5 billion repurchase initiated in April of 2004. Buybacks tend to be good. They show a company’s confidence in their business and that they see value in owning their own stock. The main benefit to the investor is a boost in the stock’s value. Obviously, with less shares out there, the value of each share climbs as do the earnings per share…Chris Mayer uses buybacks as a major determinant in assessing a company’s overall value. Share buybacks also give him an added, inside confidence in a good stock that already has a sweet balance sheet.

Irreverent Irrelevance: Epictetus was a stoic philosopher in the first century AD. He spent his youth as a slave of a former slave in Nero’s reign. A certain tale says that his master tested his mettle by tortuously twisting his leg. True to stoic indifference, Epictetus never cried out, even as his leg twisted clear off his body. Luckily for him, Epictetus got exiled along with a slew of other “seditious” philosophers. My favorite recollection of Epictetus, no doubt garbled by addled memory: “Take caution in the things you control and have confidence in those that God controls.” Not bad advice.

Detritus: Greg’s shamefaced admission. I’m too cynical for a 26-year-old. I used to have very little hope for the generation younger than mine. They just seemed, well, disinterested. Luckily, I got disavowed of that unhelpful notion yesterday. You see, James Boric and I went over to a blue-collar neighborhood’s high school and gave mock job interviews to graduating seniors. 80% of them impressed me. Impressed me very much. These kids have clarity on what they want to do and an itchiness to go out and do it. I have no doubt that they will succeed – if not in what they want to do now, then in whatever presents itself to them in their private odysseys. So, I stand corrected. This is the most pleasant way to be wrong!

The Daily Reckoning

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About Chris Mayer:

Chris Mayer is a financial analyst with Bonner & Partners. He has been quoted many times by MarketWatch and has been a guest on Forbes on Fox, Fox Business and CNN Radio, and has made multiple CNBC and radio appearances. He’s also contributed to The Washington Post. Chris travels the world looking for great ideas and insights for his readers.